This study aims at exploring the relationship between efficiency and the capital structure of cash grain farms in Illinois.Many studies have examined operational efficiency of farm businesses in both developed and developing economy settings. However, the relationship between efficiency and a farm's capital structure has received much less attention, especially using the agency cost and free cash flow concepts of modern finance theory. The agency cost concept (Jensen and Meckling) hypothesizes that the costs of monitoring, bonding, and adverse incentive that characterize a borrower-lender relationship with asymmetric information and incentives, will detract from operational efficiency and hamper business performance. In contrast, the free cash flow concept (Jensen) hypothesizes that increased effort by agents to meet leverage-induced financial obligations will enhance efficiency and improve business performance.This study utilizes these contrasting finance concepts to empirically evaluate the relationship between efficiency and the financial structure of cash grain farms in Illinois. It is also concerned with the effects of farm size, tenure ratio, soil rating, age of the operator, and a measure of risk of the farm on efficiency.Empirical analysis using nonparametric methods on data for the year 1994 show that expenditures could have been by (1 - $E\sb{i}(x\sp\circ , y\sp\circ )$) = 13.1%. The econometric results suggest that technical efficiency of Illinois grain farms has significant positive relationships with four farm characteristics. It increases with an increase in: the farm size in acres, the tenure ratio, the current debt to total asset ratio, and soil rating. However, this study does not find any significant relationship between production efficiency and age of the illinois grain farmers.The results for the ratios of current debt to total farm assets suggest significant linkages between the capital structure of the farms and their production efficiency. The ratio of the current debt to total farm assets (CDTA) accounts for the portion of debt used to finance production practices and meet other near term financial obligations. CDTA has a significant positive relationship with technical efficiency, which implies that farmers with higher current debt loads exert greater effort to meet their financial obligations resulting in improvements of their business performance and enhancement of their technical efficiency. However, the existence of a bank loan may certify that farmers are efficient, and hence, less of a credit risk. This supports the argument that a loan approval may provide a credible certification of the technical efficiency of the borrower.